WASHINGTON, DC -- An international tribunal has begun considering a claim that the United States must pay a foreign investor almost $1 billion because of a California measure to prevent water contamination.

The Canadian challenger, Methanex Corporation, has argued that a plan to remove the toxic chemical MTBE (methyl tertiary butyl ether) from California's gasoline violates the North American Free Trade Agreement (NAFTA).

Methanex is a major producer of methanol, one key component of MTBE. Methanex claims that under NAFTA, it is owed $970 million in profits it will lose if California bans MTBE.

Methanex has sued under Chapter 11 of NAFTA, a clause intended to protect foreign investors when they sink money into projects in NAFTA member countries, including the United States, Canada and Mexico. In this case, Canadian Methanex says an environmental law passed by a U.S. state would cost the company millions in lost profits.

"The Methanex case is a clear illustration of one of NAFTA's most serious environmental flaws," said Martin Wagner, attorney for the environmental group Earthjustice. "Methanex's claim is tantamount to extortion, because they are demanding almost a billion dollars if California insists on keeping its drinking water free of toxic contaminants."

California Governor Gray Davis ordered the MTBE phase out by 2003 after studies showed that the additive may cause cancer as well as neurological, dermatological and other problems in humans.

Leaks of MTBE from cars, boats and underground storage tanks are threatening serious contamination of California's water supplies.

Several other states have banned or proposed banning MTBE, and the federal government is considering a nationwide ban. After months of intense negotiations, the Senate Environment and Public Works Committee voted Thursday to ban MTBE across the United States.

"Methanex and other investors are claiming that NAFTA requires governments to pay polluters not to pollute," said David Schorr, director of World Wildlife Fund's Sustainable Commerce Program. "Something is seriously wrong with the way the NAFTA investment chapter is working."

Environmental groups sent a letter to the U.S. government on Friday, demanding that the U.S. prevent deliberations on the dispute from harming the environment. The letter also demands that the U.S. "vigorously support" the right of citizens to be heard.

Under NAFTA, arbitration tribunals are modeled after private commercial arbitrations: they are held behind closed doors, with no avenues for the public to participate and observe. Two environmental groups have formally requested that the arbitrators agree to consider briefs they intend to submit. Methanex is opposing these requests, while the U.S. government has so far refused to clarify its position.

"Serious questions of public policy and constitutional law are being decided in secret," said David Waskow, trade director at Friends of the Earth. "These NAFTA provisions are badly slanted in favor of providing access for multinational corporations, while shutting out ordinary citizens and local communities."

In a similar case decided earlier this month, an international arbitration tribunal ordered Mexico to pay $16.6 million to a California company, Metalclad, after the Mexican state and municipal governments refused to permit the company to operate a hazardous waste facility near local residences.

Metalclad built the hazwaste facility after getting permits from the Mexican federal government. But the governments of the state and city of Aguascalientes refused to permit the facility to open or operate, leaving the property standing vacant for years.

Metalclad wanted its money back.

The NAFTA arbitrators considered the city's refusal to allow the plant to operate -- based on opposition to the project by local residents and concerns that the facility would cause environmental harm -- a violation of NAFTA's requirement of "fair and equitable treatment."

The tribunal also found that the state government had violated NAFTA by declaring the area around the waste facility site an ecological zone in which potentially polluting activities are prohibited to protect rare cactus. The measure meant the facility could not operate there.

In a U.S. court, the Metalclad challenge would have failed. Under U.S. law, the state governments action would likely not be considered a taking of the investor's property requiring compensation under the U.S. Constitution, as interpreted by the Supreme Court.

The NAFTA arbitrators, however, required payment to the company, regardless of whether or not the measure was necessary to protect the environment.

Environmentalists are citing the Methanex and Metalclad cases as examples of some of the worst environmental and democratic shortcomings of NAFTA.

"Redefining the carefully balanced approach of U.S. constitutional takings law in a trade agreement will have a chilling effect on the ability of U.S. local, state and federal governments to protect the environment," said Jake Caldwell of the National Wildlife Federation.

"These cases illustrate that international corporations are on the offensive," said Stephen Porter, senior attorney with the Center for International Environmental Law. "They are using trade rules to advance narrow commercial interests by challenging society's efforts to protect the environment and public health."

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